7/12/2006 @ 6:00PM

The PayPal Exodus

Maybe there was something in the beer at Fanny and Alexander’s. During the height of the first Web boom, the Palo Alto, Calif., hot spot doubled as a clubhouse for PayPal employees, who frequently gathered at the restaurant’s large outdoor patio during the online payment company’s early days.

But after online auction giant
eBay
bought the startup for $1.5 billion in 2002, the tight-knit group dispersed. Many have gone on to found some of Silicon Valley’s most talked-about companies: The PayPal diaspora includes the founders of such trendy Web sites as YouTube and LinkedIn, as well as heavy-hitters at prestigious investment firms like Clarium Capital and Sequoia Capital.

“I really haven’t seen so many entrepreneurs spin out of a single company before,” says Jeremy Stoppleman, former vice president of technology at PayPal, and the current chief executive of local-reviews site Yelp.com.

It’s not uncommon for startup founders to leave after selling their company, particularly when they’re rolling in cash. Former PayPal Chief Executive Peter Thiel, for instance, owned shares worth about $68 million at the time of the eBay acquisition. That kind of money makes it easy to start over again.

But years later, PayPal is still losing some of its top staff. Last year, Chief Technical Officer Chuck Geiger left the company. And last week, eBay said PayPal president Jeff Jordan will leave the company after a two-year stint at the top, a move viewed negatively by some analysts. “We view the senior management changes with concern, as they come at a critical time for eBay,” wrote Douglas Anmuth, an analyst with Lehman Brothers. Last month, search heavyweight
Google
launched Google Checkout, an online payment system aimed directly at PayPal and eBay.

Former PayPal employees estimate that half of the 200 or so employees who worked at the company’s headquarters before the 2002 acquisition have left; of the company’s original 50 employees, they estimate, fewer than a dozen remain.

“There’s brain drain at PayPal, and it reflects how things are going over there,” says Eric Jackson, a former interim vice president of marketing at PayPal who left the company in 2003. Jackson, who now runs World Ahead Publishing, is the author of The PayPal Wars: Battles with eBay, the Media, the Mafia and the Rest of Planet Earth.

While PayPal’s original vision may remain, the startup’s culture is long gone, Jackson says. He points to Jordan’s replacement: Rajiv Dutta, the former head of Skype, the Internet telephone service eBay bought last year. “Elevating an eBay executive to run PayPal instead of finding someone within PayPal to do it made a statement about how they wanted to run things,” Jackson says.

EBay spokeswoman Amanda Pires says the company has been able to hang on to many original PayPal employees. “Four years later, we’re still proud of our retention of those people,” she says. “We were able to keep PayPal’s vision–and after some acquisitions, that’s just not the case.”

But PayPal vets say their former company had a particular spirit that would have been hard to sustain, no matter who bought the company. Before the eBay acquisition, for instance, young engineers without any business background were encouraged to talk back to executives.

“I was a 22-year-old whippersnapper, and I remember firing off this e-mail that disagreed with the entire executive staff,” says Yelp’s Stoppelman. “I didn’t get fired–I got a pat on the back.”

It was this freewheeling management style, along with a shared struggle and a thriving alumni network, that has allowed ex-PayPalers to succeed after leaving the company, argues PayPal co-founder Max Levchin. “A lot of the things that happened to us were inspirational,” he says. “We went through this insane rollercoaster–’rags to riches’ doesn’t even begin to describe it.”

That may be why many PayPal alumni tend to end up working with each other at their new ventures–most companies founded by ex-PayPal employees feature at least two high-level PayPal vets. “You can skip the courting period–those [PayPal] ties drive businesses today,” Levchin says. “Look at YouTube [co-founded by two PayPal veterans]. It’s like a reunion over there.”